If you are new to this blog, you are invited to read first “The Largest Heist in History” which was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

This blog demonstrates that:

- the financial system was turned into a pyramid scheme in a technical, legal sense (not just proverbial);

- the current crisis was easily predictable (without any benefit of hindsight) by any competent financier, i.e. with rudimentary knowledge of mathematics, hence avoidable.

It is up to readers to draw their own conclusions. Whether this crisis is a result of a conspiracy to defraud taxpayers, or a massive negligence, or it is just a misfortune, or maybe a Swedish count, Axel Oxenstierna, was right when he said to his son in the 17th century: "Do you not know, my son, with how little wisdom the world is governed?".

Thursday 13 January 2011

How banks' role changed


Traditionally the banks' role was to be a risk agent between a depositors and lenders. Banks were talking deposits and were lending them making money on the interests rate difference between the two. This process was underwritten by banks capital which was risked by banks' owners in case they ended up with too many bad loans and the bank failed. In this case banks owners lost money and possibly some depositors. So on one side there was a pressure on the banks to be careful (as owners did not want to lose their capital) but on the other as there was a large number of banks (in the past) there was competition pushing the cost down and innovation up.

For the last couple of decades the number of banks decreased and they became too big to fail. As a result they were rescued by the government. Banks are no longer risk agents (underwritten by private capital). They became public utilities, huge oligopolies, whose business is underwritten by the state. And they behave as such.

The only way to restore a proper banks' role in the economy is to do what, quite likely, Margaret Thatcher would have done. In line with principles of free market, the banks should be broken up into much smaller enterprises so no bank is too big to fail and capitalise them by selling additional share if necessary. And these banks, indeed a large number of them, should be forced to compete against one another. Depositors will be able to buy an insurance policy against failure or a state may charge a levy on banks as such insurance. And like any other business, sometimes, one of those banks will fail. This will be a proper free market cleansing of weak business which is necessary for free markets to operate. Other banks will pick up the pieces to take over a customer book - a major value of any bank - of a failed bank and if this did not cover deposits of the failed bank the insurance would cover the rest.

The government has to understand such basics: if banking system is regulated properly, there are no banks which are too big to fail, it is not different than any other business.
Posted by Greg Pytel at 16:55
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8 comments:

  1. An Oasis14 January 2011 at 00:42

    Hey Greg

    Great posts, as ever. Love the John Varley quote in the side bar.

    When you have time would it be possible to know you opinion on how Iceland has handled this whole scam?

    Rich

    ReplyDelete
  2. Greg Pytel14 January 2011 at 00:58

    Hi Rich

    Thanks for a nice word:-) I am not an expert on Iceland so my comment may not be accurate and please respond with correction.

    Firstly Iceland was never a proper offshore financial centre. A proper financial centre deals with all sorts of money (sometimes of dubious or even criminal origin) in a very conservative and professional way. You are unlikely to hear about liquidity crisis of a proper offshore bank.

    Iceland went simply on a binge of being a part of financial innovations. They built a massive financial pyramid. When it collapsed they took a hit. But they wrote a lot of these losses off, their currency collapsed thereby making their economy more competitive and started working hard. I remember Iceland president had gut to protect the nation against massive financial demands.

    Iceland people are very hard working and clever. They were simply carried away by credit binge and they got back to their senses. I got a feeling that Iceland will emerge successful much quicker from the current crisis than other western countries. (The fact that it is a small and well organised country will help.)

    This is how I feel.If you think my judgement is flawed let me know.

    Best

    Greg

    ReplyDelete
  3. An Oasis23 January 2011 at 10:20

    Hi Greg

    Thanks for taking the time to reply.

    Not much to add, your experitise is far greater than mine (it was your ponzi scheme explanation which caused the penny to drop for me…).

    Icelanders should be grateful that it did not join the EU and can restructure debts… using its own currency. It has been interesting to see how financially aware the Icelanders seem to be (unlike people in the UK), I’m not sure of this is through a good education system or they have had to learn fast? However, I am stunned at how little MSM coverage there has been since Icelands decision. It is all so pro UK rather than watching and learning.

    This article caught my eye and reminded me aboput your post http://market-ticker.org/akcs-www?singlepost=2369538 - not sure what your lining policy is (but I will not be offeneded if you delete…)

    Regards


    Rich

    ReplyDelete
  4. Greg Pytel23 January 2011 at 10:47

    Hi Rich

    I think you added a very important point: yes, in Iceland bankers are being prosecuted. In my view this is the best insurance policy against any future crisis as the new echelon of bankers will be quite wary not to end up in the same way. This is far better than any regulations that are currently considered which are actually likely to increase risk of future financial crisis. (This is the subject I will be soon writing about.)

    Best wishes

    Greg

    ReplyDelete
  5. APC30 January 2011 at 19:11

    I must say that I agree with everything said here, I mean who would'nt, except of course "The only way to restore a proper banks' role in the economy is to do what, quite likely, Margaret Thatcher would have done." This strikes me as particularly naive, seeing as how that twat was as beholden to the bankster class as anyone, if not more...

    Great blog. I'll keep reading.

    ReplyDelete
  6. Greg Pytel30 January 2011 at 21:34

    Hi APC

    Thanks for reading my blog and your kind comment. If you think my blog merits it, please spread the link to it around.

    I am not going to argue about what Maggie Thatcher would or would not have done had she faced the same crisis. I simply do not know. However if we judge her now, I think it is fair to say that she was a person of decisive action and immense integrity, who believed in the capitalism based on housewife finance understanding and small and medium size businesses. Therefore it seems to me that it is very probable that she would have take on the financial industry with the same zeal and sense of purpose as she took on Arthur Scargill. I do not think she would have been prepared to tolerate the current behaviour of the financial industry towards the government. Rightly (or maybe wrongly) some heads would have rolled.

    Best wishes

    Greg

    ReplyDelete
  7. APC31 January 2011 at 02:22

    Not to beat a dead horse, but Thatchers relentless attack on the NUM was payback for the collapse of the Heath government in my humble opinion. As far as "immense integrity" is concerned, well:

    http://www.youtube.com/watch?v=0SQuFjH3AUA

    ReplyDelete
  8. Greg Pytel31 January 2011 at 07:46

    Hi APC

    You may be right. But this is politics and power struggle. In this case I am not trying to defend Thatcher stand on miners but she simply did not want to end like Heath (and despite what she was doing she was not far fram that).

    Best

    Greg

    ReplyDelete

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